Domicile of a Pseudo Foreign Corporations

Following on the success of the corporate model at a national level, many corporations have become transnational or multinational corporations: growing beyond national boundaries to attain sometimes remarkable positions of power and influence in the process of globalizing. In the spread of corporations across multiple continents, the importance of private international laws has grown many folds. Conflict of laws, or private international law, or international private law, in common law system, is that branch of international law and interstate law that regulates all lawsuits involving a “foreign” law element, where a difference in result will occur depending on which laws are applied.

What is Pseudo Foreign Corporation?

A Pseudo-foreign corporation is a corporation incorporated in a jurisdiction with which it has minimal business contacts. Corporations may incorporate in foreign jurisdictions in order to minimize liability, taxes, or regulatory interference.

The pseudo-foreign corporations are awarded a different treatment from a national company when it comes to deciding the applicable law. Various factors are considered in determining the applicable law.

Domicile and Residence of Corporation in Common Law.

The Cesena case

The Cesena Company was incorporated in England under Companies Act for the purpose of taking over and working sulphur mines at Cesena in Italy. The practical business of manufacturing selling the sulphur was administered by an Italian delegate. No products were ever sent to England, the books of account were kept in Italy, the company was registered in Italy and two third of the shareholders were Italian. Taken by themselves, these facts went to show that the centre of business was Italy. As against them, however, the memorandum of association set up a Board of Directors in London which controlled the “sale, order, direction, and management” offs ‘the working of the company’s mines, the mode of the disposal thereof, and the general business of the company”. The shareholders’ meetings were held in London, and it was there that dividends were declared. In the result it was held that, since almost every act of the company connected with its management was done in London, the main place of business in London, and that therefore the company was held to be the resident of England and thus was liable to pay Income tax at London only.

The British court emphatically states that the true rule for determining the place of residence of a company for the purpose of Income tax is ‘where the company’s real business is carried on’ and in the opinion of the court the ‘real business’ is carried on where the company’s control and management abides. Usually the control and management abides where the general meetings take place.

Indian Position

The law in India is essentially based on Common Law system and English precedents. The present Indian legal system does not contain any specific provision on any cross –border relations, but is spread over various legislations.

Origin of a corporation

The domicile of origin in the case of a company is the country where it is registered, i.e., the place or country of its incorporation. Thus, a company formed under the English Companies Act has an English domicile if it is registered in England. Similarly, a company incorporated under the Indian Companies Act will have an Indian domicile. This has been recognized by the Indian Supreme Court in the case Technip SA v. SMS Holding (Pvt.) Ltd. & Ors , the court observed that:

“Questions as to the status of a corporation are to be decided according to the laws of its domicile or incorporation subject to certain exceptions including the exception of domestic public policy. This is because a corporation is a purely artificial body created by law. It can act only in accordance with the law of its creation. Therefore, if it is a corporation, it can be so only by virtue of the law by which it was incorporated and it is to this law alone that all questions concerning the creation and dissolution of the corporate status are referred unless it is contrary to public policy.”

In addition according to Indian Income Tax Act, a company registered outside India but having its management and control in India, is considered an Indian Company for the purpose of corporate taxation. The domiciles of the shareholders have no influence in determining the domicile of the company.

Domicile and Resident corporations

The question of domicile of a company or its residence is completely notional, as the company not being a living person cannot reside or domicile. The question arises essentially for the purpose of the levy of taxes. Under the Income Tax Act, a person is liable to pay tax in India and under section 6 (3) (ii) of the Act a foreign company is regarded as a resident unless in the previous year its management or control was situated completely outside India.

The Supreme Court quoting from De Bears consolidated Mines vs. Howe held the following in the case of Subbaya Chettiar vs. CIT, Madras – ‘The Company resides for the purpose of Income Tax, where its real business is carried on, and the real business is carried on where the actual management or the control resides.’

Winding Up of Pseudo Foreign Company.

It has been held in many decisions that a foreign company can be ordered to be wound up in India.

American Position

If a case involving a pseudo-foreign corporation comes before an American court, the court exercises its jurisdiction after determining the domicile of the pseudo-foreign company. There are two conflicting opinion on what would constitute the domicile of a pseudo-foreign corporation and they are as follows:

1. The domicile of a company would be the place where it was incorporated.

2. The domicile of a company would be the place of business or where it mostly transacts.

Lex Incorporationis (Law of State of Incorporation)

Under this approach the court decides the domicile of the pseudo-foreign company to be the place where it was principally incorporated. The doctrine recognizes that interests of certainty, protection of legitimate expectations and reducing the prospect of inconsistent obligations require that only one state have the authority to regulate a corporation’s internal affairs. In addition, the doctrine generally requires that the law of the sate of incorporation govern allegations of director or officer breaches of fiduciary duty owed to the corporation and its shareholders. When the rights of third parties unaffiliated with the corporation are at issue, however, the doctrine does not apply and ordinary choice of law principles govern.

The Place of Business

This approach of determining the domicile is often called the traditional approach. Under this approach the court may exercise jurisdiction as to any cause of action, if defendant is domiciled in the forum state or its activities there are substantial, continuous & systematic even if unrelated to the defendant’s activities within the state. This form of personal jurisdiction is known as general jurisdiction. However, even if a non-resident defendant’s contracts with a forum state are sufficiently ‘continuous & systematic’ for general jurisdiction, it may still be subject to jurisdiction on claims related to its activities or contracts there. This form of personal jurisdiction is known as limited jurisdiction.

As can be seen, there is no uniformity among the courts on the issue under review. This can lead to inequitable results. In the cases of Calder v. Jones and Keeton v. Hustler Magazine, Inc. these issues were discussed. The Supreme Court held that merely having jurisdiction over a business entity is not tantamount to having jurisdiction over the owners or employees of the entity. Rather, one must find the requisite “minimum contacts” as to each individual separately. Where one owns a pseudo-foreign corporation and is domiciled in the Forum State, the courts there already possess general personal jurisdiction over the owner. In such a situation, the “majority rule” is that the law of the place of formation decides the issue.

Despite this difference of opinion, one thing is absolutely clear: “The central question in choosing the appropriate law to govern a corporation asks whether the particular issue involved is an internal one or one that involves third parties.

Conclusion

The nature of the corporation continues to evolve through existing corporations pushing new ideas and structures, courts responding, and governments regulating in response to new situations. A question of long standing is that of diffused responsibility: for example, if the corporation is found liable for a death, then how should the blame and punishment for this be allocated across the shareholders, directors, management and staff of the corporation, and the corporation itself?

The present law differs among jurisdictions, and is in a state of flux. Some argue that the owners of the business – the shareholders – should be ultimately responsible for such circumstances, forcing them to consider issues other than profit when investing, but the modern corporation may have many millions of small shareholders who know nothing about its business activities. In addition, traders — especially hedge funds — may rapidly turn over their partial ownership of a corporation many times a day.